Posts Tagged ‘Bank of America’

One of the most important rules governing fiduciaries is that they must never commingle the money they manage for others with their own funds. This overriding principle applies to personal representatives of estates (sometimes called executors), conservators of the estates of minors and incapacitated adults, trustees, and agents operating under powers of attorney. Sometimes this powerful rule can cause problems for other individuals or organizations when they deal with fiduciaries—especially banks, who are expected to understand the financial rules.

Ronald Henry Minkin was the executor of his mother’s estate and its sole beneficiary. When he sold her house, he took the $196,000 check representing the net proceeds to Bank of America, where he kept his personal accounts, and deposited the check in an account in his own name. The bank did not question his authority to convert the estate asset to his own name.

Unknown to the bank, however, Mr. Minkin had borrowed money from lender Cochran Investment Co., and had promised to repay the loan from his mother’s estate when it was ready for final distribution. Because the sale proceeds never made it into the estate account, there was nothing left to pay back his debt when it came time to settle the estate.

Cochran sued Mr. Minkin, of course, but he had already spent the money he took from her estate. So the lender also sued Bank of America.

The bank moved to dismiss the lawsuit, arguing that it was not responsible for Mr. Minkin’s misuse of his mother’s estate. In response, Cochran pointed to a provision of the Uniform Commercial Code as it was adopted in California. That law provides that a bank may be liable for allowing an executor to deposit money into his own account if it can be shown that the bank knew that the money did not belong to him or her. Some version of the UCC has been adopted in 48 states, Puerto Rico and the District of Columbia; Arizona’s version is essentially identical to the law as it was adopted in California.

In Mr. Minkin’s case, the proceeds from sale of his mother’s house were in the form of a check made payable to “Ronald Henry Minkin, Executor, Estate of Rose Minkin Sabia, Deceased.” That, ruled the California Court of Appeals, was a pretty clear indication that the bank knew the money did not belong to Mr. Minkin individually.

Bank of America also argued that Cochran should not be permitted to file its lawsuit more than three years after the bank allowed the deposit into the wrong account. The Court of Appeals disagreed, holding that the lawsuit could be filed at any point before three years after Cochran actually learned of the misapplication of money from Mr. Minkin’s mother’s estate. Cochran Investment Co., Inc., v. Bank of America, August 19, 2002.

When a trustee charges fees in excess of what is due, how much should it have to repay to the trusts? That was the question posed and decided recently by the U.S. Court of Appeals for the Ninth Circuit, sitting in California.

Security Pacific National Bank merged into Bank of America in 1992. Before the merger, Security Pacific operated a trust department which was handled thousands of trusts. In over 2500 of those trusts, the bank had signed fee agreements with the individuals whose funds had established the trusts.

In each of the trusts in question, Security Pacific’s fee agreement set out a percentage fee and committed the bank not to raise that percentage unless the trusts’ settlors agreed or the probate court ordered the higher fee. Despite those agreements, the bank raised its fees a total of nine times between 1975 and 1990.

When Bank of America took over Security Pacific’s trust department it discovered that fees had been collected illegally. The improper fees amounted to more than small change—Bank of America calculated the overcharge at $24 million, which it refunded in 1994. It also calculated that it owed interest totaling $17.8 million, and refunded that amount as well.

Late in 1994 Carol F. Nickel sued the Bank of America on behalf of one of the trusts and asked that her lawsuit be certified as a class action. She argued that the bank should at least have compounded the interest it paid when it reimbursed the trusts, and that it really should have paid a portion of bank earnings during each of the years of the overcharges. The case ended up in federal court and ultimately in the Circuit Court of Appeals.

California law expressly provides the remedy for a breach of a trustee’s fiduciary duty, but the statute gives the court several options as to how to calculate the damages. One way—the one chosen by the District Court—is to calculate the damage plus simple interest at the legal rate. Another would have been to calculate the amount that each trust would have earned had it been allowed to retain the fees wrongfully collected, but the District Court found that approach to be impossible to implement in 2500 individual cases, and the Court of Appeals agreed.

The third method of calculating damages, rejected by the District Court, was the Court of Appeals’ favorite, however. Saying that “the elementary rule of restitution is that if you take my money and make money with it, your profit belongs to me,” the Court of Appeals ruled (by a 2-1 vote) that the proper measure of damages was to calculate the share of the bank’s profit in each year attributable to the overcharges, and to have that amount paid to the trusts. Nickel v. Bank of America National Trust and Savings Association, May 17, 2002.